Bill Jamieson: Forget stimulus, we need realism
THINGS are grim and it is going to take more than hyper-babble about wellbeing to fix them, writes Bill Jamieson
Still feeling happier now? Barely had the ink dried on the Office for National Statistics Index on Well Being this week than latest estimates of the UK’s economic performance have blown away those happiness readings like a dandelion puff.
Unless you were living in happy-clappy Orkney, or better still, perhaps, the Bass Rock, the preliminary reading of a 0.7 per cent decline in the second quarter is seriously depressing news.
Prime Minister David Cameron has hailed the ONS efforts to construct a Happiness Index as crucial to finding out what the government can do to “really improve lives”. If you had any doubt that at the top of the coalition government there is a mental state close to total nervous breakdown, this is it.
Even making allowances for the extra Diamond Jubilee Holiday and the atrocious weather that hit construction this summer, this reading for Gross Domestic Product is far worse than expected and will cause the anxiety reading of Chancellor George Osborne to jump. He now faces an autumn political party conference season dominated by criticism of the coalition’s economic strategy and growing calls for a change of direction.
The pressing issue now is how long the UK can cling to its coveted triple A credit rating in the face of growing slippage in the deficit reduction programme and an economy now headed for a third year of going nowhere.
The immediate issue for the Prime Minister faced with growing calls for change is whether his Chancellor and close political friend now has much credibility left. Can Osborne take the UK into another year of attempted deficit reduction with an economy set at best to sputter along the bottom? Or could he use a half-term Cabinet reshuffle to bring a fresh approach?
A tempting solution would be to swap the Foreign Secretary and the Chancellor and bring in William Hague to No 11. He is experienced, he performs well in the Commons, he does not have the baggage of a privileged background and he would be a match for the shadow chancellor, Ed Balls.
But the bigger question is whether a new face and the appearance of a change of direction would make much difference to an economic outlook so heavily overcast by the deepening sovereign debt crisis in the eurozone and worries over slowdown in America and China. These were the big worries that drove global stock markets down this week.
Here in the UK there is significant monetary stimulus in the pipeline by way of further quantitative easing by the Bank of England and the new Finance for Lending scheme to encourage banks to step up lending to business. It is not a liquidity shortage from which we suffer. As I wrote here two weeks ago, Britain’s leading companies have accumulated a large cash hoard on their balance sheets.
The critical missing ingredient is confidence, and while the eurozone crisis casts a black cloud over financial stability and export prospects, there is little prospect of a resurgence in animal spirits that would bring an upturn in business investment, expansion and new jobs.
Thus, while the miserable first estimate of GDP for the April-June quarter may well be revised up – that 5.2 per cent plunge in construction sector output looks particularly severe – it is now clear that the UK’s economic weakness runs deep and there is little sense of light on the horizon.
Production output, which includes manufacturing, declined by 1.3 per cent, while services output was down 0.1 per cent. GDP is now 1.4 per cent below the third quarter of 2011 and 4.5 per cent below its peak level in the first quarter of 2008. The economy has basically flatlined for two years and, with household deleveraging, heavy fiscal drag and weakness in key EMU export markets, it is likely to be roughly flat for the next 12-18 months as well, with a contraction of 0.5 per cent now the expectation for 2012.
Nor can Scotland point to a better prospect. CBI Scotland’s Industrial Trends Survey, out yesterday, shows business confidence has fallen due to lower expectations for export orders and falling domestic orders. Growth of total new orders turned slightly negative, domestic orders declined for the fifth consecutive quarter and export business is expected to grow more slowly over the next quarter.
Iain McMillan, director of CBI Scotland, warns that “Scotland faces some unwelcome headwinds over the next three months. Expectations of weaker exports growth, and domestic demand that continues to fall, make for a difficult economic climate”.
Calls for an easing of the fiscal stance will now intensify. But how tight, really, is the squeeze? Recent public finance figures showed public spending rising 1.9 per cent in the first quarter and that government borrowing is rising compared with the previous corresponding period of 2011-12, so tightness in fiscal policy can hardly be the prime cause of economic contraction. Plans are also advanced to provide government financial guarantees for infrastructure projects to encourage private sector investment. But all this takes time to show through in a pick-up of those ready shovels.
The best we can immediately hope for is that the recent labour figures do point to an underlying resilience in the economy, lower inflation will help the consumer sector, the “funding for lending” scheme will start to kick in and that the third and fourth quarters will see an uplift.
But it is going to take a big gesture to act as a catalyst for household spending and business investment. If the coalition is looking for a bold step to lift the economy out of its torpor then nothing less than a tax cut, albeit temporary, will change the public mood.
This could take the form of a lifting of VAT on home improvements or a rise in tax thresholds to help boost household budgets and domestic demand.
But even this will have to contend with financial news dominated by deepening eurozone woes – a likely bailout for Spain and a Greek exit from the single currency. Amid all the calls for stimulus, the greater need is for realism – and a little less hyper-babble about wellbeing and happiness from the ONS.
If you want to lower the national anxiety level, best not to send government statisticians chasing rainbows.
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Tuesday 21 May 2013
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